Being a Houston baseball fan has been largely pain, misery and suffering. While we have not gone 80+ years or even a century without winning a World Series it is not for lack of ineptitude. It is because the Houston Major League Baseball (MLB) entry only came into existence 1962. We were not even the Astros back then, but the Colt-45’s. Playing in the world’s greatest open air mosquito pit, Colt Stadium, sort of set the tone for the franchise. Of course, we did have one glorious run into the World Series in 2005 but even there, we were swept by the Chicago White Sox, who at that point had not won a World Series since 1917. At least I can finally say I went to a World Series and I did get to scream my lungs out in the bottom of the 9th inning of Game 4 where the Sox completed their sweep.

Now the Astros have the best record in baseball, with a sterling 29 wins and 12 losses for a .707 winning percentage. Although it is only May all of Houston is celebrating, knowing what may well lie ahead. Put another way, there is only way for the Astros to go and it is not up.

I thought about the Astros in the context of Chief Compliance Officer (CCO) leadership or even Chief Executive leadership around compliance when I read a couple of recent articles in the Financial Times (FT). The first was by Andrew Hill in his On Management column, entitled “Spectacular failures that prime leaders for success”, where he discussed the concept of failure as a “powerful educator”. One of the reasons I mine Foreign Corrupt Practices Act (FCPA) settlements for lessons to be learned is that I believe compliance professionals can learn from the missteps of other companies to make their compliance programs more robust.

I agree with Hill that it may seem odd to celebrate failure but to ignore it condemns one to repeat either your own missteps or the mistakes of others which are in the public record. He noted, “But wilfully ignoring failure is poisonous, too, and coverage of business inevitably promotes a misleading cult of success. One reason is that “failure” is a poor selling point for a book, presentation or article. Another is that most failures, by definition, never get far enough to be worth analysing, even assuming they are noticed by the outside world.”

The point is to learn from failures. This is memorialized in Prong 1 of the Department of Justice’s  (DOJ’s) Evaluation of Corporate Compliance Programs (Evaluation) which details, “Root Cause Analysis – What is the company’s root cause analysis of the misconduct at issue? What systemic issues were identified? Who in the company was involved in making the analysis?” Hill echoed these questions when he wrote, “chief executives who talked about mistakes as failures were less likely to perform strongly. The best recalled their regret and disappointment, but looked for root causes and integrated what they had learnt into their future actions. In short, they became more adaptable.”

Equally interesting was an article by Tim Harford, in his column The Undercover Economist, entitled “Why prizewinning chiefs risk a swift fall from grace”. He began by discussing the awkwardness  which PRWeek brought upon itself when it awarded United Airlines chief Oscar Munoz as “Communicator of the Year” shortly before the passenger “re-accomodation” scandal engulfed Munoz, the company and cost him a promotion to the Chairmanship of the United board. That was not even the worst timing as Harford noted the  “American Institute of Architects honoured the Kemper Arena in Kansas City with a national honour award, and then held its annual convention there in 1979. Alas, the roof of the arena collapsed a few hours after the architects’ convention left the site.” It is not always business awards which have the most inopportune timing. Witness the number of National Basketball Association (NBA) prognosticators who rue their votes for Russel Westbrook or James Harden about now for the NBA Most Valuable Player (MVP) award.

I raise these humorous hiccups in the context of huge increases in sales for businesses and the compliance angle. Many CCOs now wonder when they hear about a sales person who wins the company’s top sales award for hitting 10X, 100X or higher on their sales goal. They wonder how they did it. Was the sales goal so low that it constituted what we called in one company ‘sand’. Our company President was so well-known for his proclivities to under estimate annual sales revenue, he was nick-named the Sandman. Sand in your estimate is certainly one explanation.

Another might be the opposite of regression to the mean, where there is an increase for some inexplicable reason. Just as the Astros having a stunning .707 winning percentage, a sales person can have an excellent quarter, half-year or annual sales performance. One key is the historical data which might show a regression to the mean. Harford noted, “The most impressive performance may combine skill with luck. In a financial market — or a casino — the easiest way to become an outlier is to make a big bet. Unfortunately, there is no way to be sure whether you will be an outlier on the upside or the downside. Treading a different path is a good way to look spectacularly right, or spectacularly wrong — or, given enough time, both.”

This insight is important for a CCO when considering data analytics and ongoing monitoring. Monitoring allows a closer to real-time review and analysis. But another important component is having the historical data to review for longer term trends. Simply because a sales person has an outsized sales year does not necessarily mean something nefarious or even a FCPA violation. Being able to consider the full scope of historical trends can lead to more robust compliance analysis and one which may well help a company to operate more efficiently. If a super sales year is not re-creatable with an accepted sales practice one question compliance might want to ask is Why?

How about those Astros and their .707 winning percentage? I am betting on regression to the mean.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

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